The stock market rallied hard from last Wednesday through Monday in anticipation of a soft inflation print that would allow the Fed to start to pivot from its hawkish stance. All the real world price data suggests inflation is rolling over but the government calculated CPI came in hotter than expected Tuesday morning. “This report is a nightmare”, Economist Diane Swonk told Nick Timiraos of the WSJ. The NASDAQ dropped more than 5% Tuesday.
This report substantially increases the odds that the Fed will overshoot in its campaign to reign in inflation. I am no longer confident in my call that the lows for the year are in. The WSJ’s Justin Lahart has written some of the best columns on inflation and the Fed of late and he concluded Wednesday’s this way: “Whatever your odds on the danger of the Fed sending the economy into a recession were before Tuesday, they should be higher now” (“Inflation Report Has Doves Crying” [SUBSCRIPTION REQUIRED]).